Why is U.S. inflation reigniting? Wall Street bosses raged: It’s all Powell’s fault!

From: Golden Ten Data Scott Bessent, CEO and chief investment officer of Key Square Group, said that Federal Reserve Chairman Powell has been eager to take credit for achieving a soft landing for the economy. But now he has made the soft landing more difficult to achieve.
Powell predicted last week that the next move in interest rates would likely be to lower rates rather than raise them, a prediction that continues his mistake.
Bessent said earlier that the situation would have been much better if it had exercised a little more restraint.
Bessent pointed out that the marshmallow test is a psychological experiment designed to measure delayed gratification in children.
Psychologist Walter Mischel invented this test in the early 1970s. It puts a child in a room with a marshmallow and gives them a choice: either eat the marshmallow right away or. Wait a specific amount of time and then get a second marshmallow as a reward for their patience.
This test is known for its impact on self-control, willpower, and future success.
Last fall, Powell faced his own marshmallow test.
Since the beginning of 2021, inflation has risen by nearly 20%. The Federal Reserve has raised interest rates at the fastest pace in the past 40 years. At the end of last year, Powell seemed to finally have inflation under control.
By the third quarter of 2023, year-on-year growth in core personal consumption expenditures (PCE) has fallen to 2%. Financial conditions have also tightened significantly.
A soft landing and achieving the 2% inflation target appear to be within Powell\’s control.
Bessent said Powell then just had to restrain himself from swallowing the proverbial marshmallow of a rate cut and keep financial conditions tight for a few quarters.
However, he ate the marshmallow.
Powell does face intense political pressure to loosen monetary policy. Former Fed chair and current U.S. Treasury Secretary Yellen said in December that it made sense for the Fed to consider cutting interest rates.
Not to be outdone, the U.S. president has talked about monetary policy many times in recent months. He told an audience in Philadelphia earlier this year: \”I can\’t guarantee it.\”
But I bet those rates will fall even more because I bet the Fed is going to cut rates.
At his press conference in December, Powell shifted to a significantly more dovish stance, suggesting that the Fed was more focused on when to cut rates than when to raise them. Although the language of the FOMC statement was neutral, the Fed itself also forecast the future. Inflation will still exceed 2% in two years.
Powell\’s dovish policy shift in December last year led to a dramatic easing of financial conditions and planted the seeds for the inflationary recovery that the United States is now experiencing.
In fact, the S&P 500 rose 11% over the following three months.
Bessent criticizes that the resulting wealth effect may ensure that consumption grows at a pace inconsistent with 2% inflation.
Since December last year, core PCE growth has rebounded to 3.7% year-on-year. Core CPI has been even stronger. Year-on-year growth in the past three months has been 4.5%.
Bessent said that if Powell had not unexpectedly signaled a rate cut in December but had insisted on keeping interest rates higher for longer, the U.S. economy might have slowed enough to make rate cuts expected in the coming months possible.
There is no doubt that the Fed will still face huge political pressure before the US presidential election in November. But with inflation so high, cutting interest rates may not be within the scope of the Fed\’s discussion.
Powell\’s lack of self-discipline also has an impact on the distribution of wealth among American consumers.
While the wealth of the top 20% of households has received a huge boost from Powell\’s shift to dovish policies, the bottom 50% of households are struggling.
Bessent concluded: If the FOMC takes the inflation target seriously, it should withdraw Powell\’s position in December last year and completely eliminate the easing tendency, indicating that the next step is likely to be to raise interest rates.
At the press conference after the May FOMC meeting, Powell had the opportunity to do so. But he was still unwilling to give up his easing bias.
If inflation continues to be higher than target and the Fed\’s own forecasts, it will only continue to undermine the Fed\’s credibility.